Charting the Correct Month of a Futures Contract
|As a Futures trader it is important to know what the front month contract is. We can determine this by finding the contract month with the most volume. As speculators we need to trade in months with the highest volume to provide us better liquidity for both entering and exiting our trades. Also, the month with the most volume will create charts with better levels simply because of more trading activity.
Trade Station users will typically use a symbol like @S=110XN for their un-adjusted continuous charts. This symbol tells the Trade Station software to create an un-adjusted continuous chart for the Soybean market that rolls over automatically 10 trading days before the contract expires. For many markets this symbol works fine because every month that the Exchange offers for that Commodity is a high volume month. However there are some Commodity Futures that have contract months listed by the Exchange, but they do not have enough volume to become a front month. I will address which of these markets are impacted further into the article.
One of these markets is the Soybean market. Using the symbol @S=110XN has a flaw during the trading year. Soybean contracts are available for the following months each year to trade – January, March, May, July, August, September and November. As I am writing this the July contract is ready to expire so there are no speculators trading this contract until it expires. The next months in the contract cycles are August and September. If a trader using Trade Station were to use the symbol @S=110XN their charts would be putting the August Soybean prices on their continuous charts. And once August expires then it would be putting the September prices on their continuous charts, just like a continuous chart is supposed to do. The problem is the volume for these contracts are very low and the largest volume is now in the November Soybean contract making it the front month we should be trading in.
Why does the Exchange have a month listed for trading, but the volume is so low?
The Soybean markets as well as other Grain markets have something called Old Crop and New Crop years. Old crop refers to Grain that was harvested in the prior harvest season and kept in Grain elevators to be sold during winter months and for a portion of the next growing season. New crop refers to the current year’s harvest which for Soybeans will be completed by November. During the early winter months and late Spring the Grain elevators storing these Grains use the January, March, May and July contracts for hedging this old crop they have in their inventory. By the time August and September comes most of the old crop has been hedged and the market is awaiting the new crop for November delivery. Therefore there is very little need or use for the August or September Futures contracts, usually. This year the market was shocked by a U.S.D.A (United States Department of Agriculture) report showing that last year’s crop yielded about 44 bushels per acre, much higher than anticipated. (This also will support the estimate that the new crop will be near 45 bushels per acre). When this report came out Grain elevators were more than happy to use the remaining old crop contracts to hedge with. But from the speculator standpoint the largest volume remains in November Soybeans and that is where speculators should be trading.
In the end it is always about the Commercials when it comes to trading Futures. Once you have a better understanding of how they use Futures contracts for hedging you can see which contract months are their preferred choices.
How do we trade November Soybeans on a continuous chart when the software is plotting the August prices?
We must use a different type of Futures symbol to get the software to only plot the highest volume contract months on our charts. For our Soybean example we need to add some characters to the @S=110XN symbol. Once we add these symbols you never have to change them because they are consistent year after year.
Table 1 will provide a list of markets that need to have these symbol adjustments:
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.